Schroders to Buy Cazenove Capital for 424 Million Pounds

Schroders is looking to boost its assets under management after the announcement that Richard Buxton, head of U.K. equities and manager of its 3.5 billion-pound Alpha Plus fund, will leave to join Old Mutual Plc later this year. Source: Schroders via Bloomberg

Schroders will pay 135 pence a share in cash for Cazenove
Capital, which is owned by its current and former employees, the
London-based fund manager said today in a statement. The deal
will add 17.2 billion pounds of assets, increasing Schroders’s
funds under management to about 229.2 billion pounds.

The combination brings together two of the City of London’s
oldest firms, which can both trace their histories back to the
19th century. With the purchase, Schroders is seeking to counter
a decline in revenue at its private banking unit and shore up
assets in Britain as Richard Buxton, head of U.K. equities and
manager of its 3.5 billion-pound Alpha Plus fund, prepares to
leave for Old Mutual Plc later this year.

“It’s a positive deal for both parties, which will add
scale to Schroders’s underperforming private bank,” said Peter
Lenardos, a London-based analyst at Royal Bank of Canada with a
buy rating on Schroders. “It’s also earnings accretive as
Schroders had a lot of surplus capital that was earning minimal
returns.”

The stock fell 0.1 percent to 2,090 pence a share in London
trading today. The stock has risen 24 percent this year, valuing
Schroders at about 20 times earnings.

Private Bank

The purchase adds assets and expertise at a time when sales
are declining at Schroders’ private bank. Net revenue fell 17
percent to 94.4 million pounds in 2012 as the division lost
assets in Switzerland and lowered management fees amid the
European sovereign debt crisis, the firm said this month. The
takeover also allows Schroders to reduce costs as margins at the
private bank are squeezed, the company said.

“The cost of technology and infrastructure is going up,”
Philip Mallinckrodt, head of private banking at Schroders said
on a call with journalists today. “The cost of regulation is
also going up,” he said. “There are economies of scale in both
the front office and back office,” he added.

Andrew Ross, Chief Executive Officer of Cazenove Capital,
will become head of U.K. private banking at Schroders and will
report to Mallinckrodt, the firms said in the statement.

Both companies sold their more famous investment-banking
arms since the millennium -- Schroders’ to Salomon Smith Barney
in 2000, which later became part of Citigroup Inc., and Cazenove
started a joint venture with JPMorgan Chase & Co. in 2005, and
was later bought by the U.S. bank. Schroders and Cazenove
Capital now solely focus on asset management.

Surplus Capital

Schroders has about 1.14 billion pounds of surplus capital
and has been expanding through smaller acquisitions since 2008,
according to Lenardos. Last year, the firm purchased 25 percent
of Axis Asset Management, the fund management unit of India’s
third-largest private bank, and bought STW, a U.S.-based fixed-income firm with $11.6 billion of assets.

The fund manager is paying about 15.6 times Cazenove
Capital’s earnings, according to Andrew Mitchell, an analyst at
Edison Investment Research. The price is 59 percent more than
the final closing price Cazenove Capital’s shareholders were
last able to trade the stock on the company’s internal trading
system in September, the companies said.

“Schroders’ purchase of Cazenove wealth management and
investment funds businesses looks a reasonable use of its
surplus capital, if not obviously cheap,” he said.